In 2013 monetary policy continued to operate in a challenging environment characterised by ongoing, albeit moderating, financial fragmentation in the euro area. Underlying price pressures receded further amid broad-based economic weakness and continued subdued monetary dynamics. At the same time, medium to longer-term inflation expectations remained firmly anchored in line with the Governing Council’s aim of keeping inflation rates below, but close to, 2% over the medium term, confirming the credibility of the ECB’s monetary policy strategy.
Over the course of 2013 the euro area economy emerged from recession as a result of a gradual revival in domestic demand – supported by an accommodative monetary policy stance as well as by improving economic and financial market sentiment – and stronger foreign demand. However, the ongoing process of balance sheet adjustment in the public and private sector and high unemployment continued to dampen economic activity.
Inflation declined perceptibly throughout 2013, reflecting, in particular, receding contributions from energy and food prices, as well as weaker underlying price pressures. On average, inflation stood at 1.4% in 2013, after 2.5% in 2012. The underlying pace of monetary growth remained subdued and loan growth continued to decline, mainly on account of weak credit demand, although adverse factors weighing on credit supply also played a role. In the light of a weaker inflation outlook extending into the medium term, the Governing Council lowered key ECB interest rates in May and again in November, reducing the rate on the main refinancing operations to 0.25%. [...]
